Significant accounting policies
Basis of preparation
The consolidated annual accounts (the ‘annual accounts’) have been prepared in accordance with International Financial Reporting Standards (‘IFRS’) as endorsed by the European Union and with Part 9 of Book 2 of the Dutch Civil Code for the financial period ended on December 31, 2019. These annual accounts are based on the ‘going concern’ principle.
The consolidated annual accounts are measured at historical cost except for:
Equity investments, money market funds, commercial paper and all derivative instruments that are mandatory measured at fair value;
The part of loans to the private sector which is measured mandatory at fair value (refer to business model assessment and contractual cash flow assessment in this chapter below)
The carrying value of debt issued that qualifies for hedge accounting, is adjusted for changes in fair value related to the hedged risk;
Loans to the private sector and private equity investments (including FVOCI) are recognized on the balance sheet when funds are transferred to the customers’ account. Other financial assets and liabilities are recognized on the same day that FMO becomes a party to the contractual terms and conditions of the financial instrument.
Certain comparative figures have been reclassified to conform with the financial statement presentation adopted in the current year. Refer to underlying notes 11, 12, 20, 21, 26 and 27.
Group accounting and consolidation
The activities of Nuevo Banco Comercial Holding B.V., Asia Participations B.V., FMO Medu II Investment Trust Ltd. and Equis DFI Feeder L.P. consist of providing equity capital to companies in developing countries. FMO Investment Management B.V. carries out portfolio management activities for third party investment funds, which are invested in FMO’s transactions in emerging and developing markets. Nedlinx B.V. is incorporated to finance Dutch companies with activities in developing countries. FMO has a 63% stake in Equis DFI Feeder L.P. and all other subsidiaries are 100% owned by FMO.
The company accounts of FMO and the company accounts of the subsidiaries Nuevo Banco Comercial Holding B.V., Asia Participations B.V., FMO Investment Management B.V., FMO Medu II Investment Trust Ltd., Equis DFI Feeder L.P. and Nedlinx B.V. are consolidated in these financial statements.
FMO forms a fiscal unity for corporate income tax purposes with its fully-owned Dutch subsidiaries Nuevo Banco Comercial Holding B.V., Asia Participations B.V. and FMO Investment Management B.V. As a consequence, FMO is liable for all income tax liabilities for these subsidiaries.
Adoption of new standards, interpretations and amendments
The following standards, amendments to published standards and interpretations were adopted in the current year.
IFRS 16 - Leases
IFRS 16 replaces IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases-Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. The standard sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model.
Nature of the effect of IFRS 16
Prior to the adoption of IFRS 16, FMO only entered into operating leases where the leased property was not capitalized and the lease payments were recognized as rent expense in profit or loss on a straight-line basis over the lease term. Any prepaid rent and accrued rent were recognized under prepayments and other liabilities, respectively.
FMO adopted IFRS 16 using the modified retrospective method of adoption with the date of initial application of January 1, 2019. Under this method, the standard is applied retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial application.
Upon transition FMO recognized right-of-use assets and lease liabilities for those leases previously classified as operating leases. Right-of-use assets were recognized based on the amount equal to the lease liabilities, adjusted for any related prepaid and accrued lease payments previously recognized. Lease liabilities were recognized based on the present value of the remaining lease payments, discounted using the incremental borrowing rate at the date of initial application. This treatment was applied to all leases on a lease-by-lease basis.
FMO also applied the available transition relief, recognition exemptions and practical expedients wherein it:
Only applied the standard to contracts that were previously identified as leases applying IAS 17 and IFRIC 4 at the date of initial application.
Used a single discount rate to a portfolio of leases with reasonably similar characteristics instead of determining an incremental borrowing rate for every lease.
Excluded initial direct costs from the measurement of right of use assets on transition.
Applied the use of hindsight in determining which lease renewal options to include in assessing the lease term of right of use assets upon transition.
Relied on an assessment of onerous contracts in order to determine whether any lease contracts give rise to an impairment on the related right of use asset.
Has not separated non-lease components from lease components and instead account for all components as a lease.
Balance sheet impact - Increase in assets and liabilities
Property, Plant and Equipment - Right-of-use assets
Net impact on total assets
Other liabilities - Lease liabilities
Net impact on total liabilities and equity
Impact on profit (loss) for the year
Increase in depreciation and impairment of fixed assets
Increase in finance costs
Decrease in other operating expenses
Decrease in profit for the year
Impact on other comprehensive income for the year
Summary of new IFRS 16 policies
Set out below are the new accounting policies of FMO upon adoption of IFRS 16, which have been applied from the date of initial application.
FMO assesses whether a contract is or contains a lease, at inception of a contract. FMO recognizes a right-of-use asset and a corresponding lease liability with respect to all lease agreements in which it is the lessee, except for leases of low value assets (value below EUR 5 thousand). For these leases, FMO recognizes the lease payments as an operating expense on a straight-line basis over the term of the lease unless another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed.
FMO recognizes right-of-use assets at the commencement date of the lease (i.e., the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any re-measurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognized, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. The recognized right-of-use assets are depreciated on a straight-line basis over the shorter of its estimated useful life and the lease term. Right-of use assets are subject to impairment testing. Useful life for buildings is 10 years. Useful life for vehicles is 5 years and for office equipment ranges from 3 to 5 years.
At the commencement date of the lease, FMO recognises lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments less any lease incentives receivable and amounts expected to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by FMO and payments of penalties for terminating a lease, if the lease term reflects FMO exercising the option to terminate.
In calculating the present value of lease payments, FMO uses the incremental borrowing rate at the lease commencement date if the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the in-substance fixed lease payments or a change in the assessment to purchase the underlying asset. When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying value of the right-of-use asset.
FMO determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain not to be exercised. FMO applies judgement in evaluating whether it is reasonably certain to exercise the option to renew. After the commencement date, FMO reassesses the lease term if there is a significant event or change in circumstances that is within its control and affects its ability to exercise the option to renew (e.g., a change in business strategy).
The following table shows the amounts recognised in the statement of financial position
Operating lease commitments as at December 31, 2018
Weighted average incremental borrowing rate as at January 1, 2019
Discounted operating lease commitments at January 1, 2019
Lease liability as at January 1, 2019
IFRIC Interpretation 23 - Uncertainty over Income Tax Treatments
The interpretation is to be applied to the determination of taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates, when there is uncertainty over income tax treatments under IAS 12. IFRIC 23 is effective for annual reporting periods beginning on or after January 1, 2019. The interpretation has no impact on FMO.
Amendments to IAS 19 – Plan amendment, Curtailment or Settlement
In case of plan amendment, curtailment or settlement, it is now mandatory that the current service cost and the net interest for the period after the re-measurement are determined using the assumptions used for re-measurement. Also these amendments include clarification of the effect of plan amendment, curtailment or settlement on the requirements regarding the asset ceiling. This IAS 19 amendment is effective for annual periods beginning on or after 1 January 2019 and will have a minor impact when a plan amendment occurs and does not have an impact on financial statements of FMO.
Amendments to IAS 28 – Long-term Interests in Associates and Joint Ventures
The amendment clarifies that IFRS 9 is applicable to long-term interests in an associate or joint venture that form part of the net investment in the associate or joint venture but to which the equity method is not applied. Furthermore, the paragraph regarding interests in associates or joint ventures that do not constitute part of the net investment has been deleted. The amendment is expected to be effective starting from January 1, 2019. These amendments have no impact on FMO.
Amendments to IFRS 9 – Prepayment Features with Negative Compensation
Under the current IFRS 9 requirements, the SPPI condition is not met if the lender has to make a settlement payment in the event of termination by the borrower. In October 2017 the IASB amended the existing requirements in IFRS 9 regarding termination rights in order to allow measurement at AC (or, depending on the business model, at FVOCI) even in the case of negative compensation payments in case of early repayment of loans. This amendment is effective for annual reporting periods beginning on or after January 1, 2019 and does not have impact for FMO.
Annual Improvements 2015-2017 Cycle
IFRS 3 Business combinations
The amendments clarify that, when an entity obtains control of a business that is a joint operation, it applies the requirements for a business combination achieved in stages, including remeasuring previously held interests in the assets and liabilities of the joint operation at fair value. In doing so, the acquirer remeasures its entire previously held interest in the joint operation.
An entity applies those amendments to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2019 with early application permitted.
These amendments have no impact on the financial statements of FMO.
IFRS 11 Joint arrangements
A party that participates in, but does not have joint control of, a joint operation might obtain joint control of the joint operation in which the activity of the joint operation constitutes a business as defined in IFRS 3. The amendments clarify that the previously held interests in that joint operation are not remeasured.
An entity applies those amendments to transactions in which it obtains joint control on or after the beginning of the first annual reporting period beginning on or after 1 January 2019, with early application permitted.
These amendments have no impact on the financial statements of FMO.
IAS 12 Income Taxes
The amendments clarify that the income tax consequences of dividends are linked more directly to past transactions or events that generated distributable profits than to distributions to owners. Therefore, an entity recognizes the income tax consequences of dividends in profit or loss, other comprehensive income or equity according to where it originally recognized those past transactions or events.
An entity applies the amendments for annual reporting periods beginning on or after January 1, 2019 with early application permitted. When the entity first applies those amendments, it applies them to the income tax consequences of dividends recognized on or after the beginning of the earliest comparative period.
These amendments have no impact on the financial statements of FMO.
IAS 23 Borrowing Costs
The amendments clarify that an entity treats as part of general borrowings any borrowing originally made to develop a qualifying asset when substantially all of the activities necessary to prepare that asset for its intended use or sale are complete.
The entity applies the amendments to borrowing costs incurred on or after the beginning of the annual reporting period in which the entity first applies those amendments. An entity applies those amendments for annual reporting periods beginning on or after 1 January 2019, with early application permitted.
These amendments have no impact on the financial statements of FMO.
Issued but not yet adopted standards
Other significant standards issued, but not yet endorsed by the European Union and not yet effective up to the date of issuance of FMO’s Annual Report 2019, are listed below.
Amendments to IAS 1 and IAS 8
The IASB has issued amendments of IAS 1 and IAS 8 to clarify the definition of material, specifically explaining obscuring, reasonable influence and primary users. The effective date for these amendments is for annual reporting periods beginning on January 1, 2020. FMO has adopted IFRS 9 Financial instruments in 2018 and has used various material estimates for that matter based on the current definition of material. In 2019 FMO will assess and incorporate the amendments to material into the valuation of all financial instruments. No early adoption has been performed by FMO.
Amendments to References to the Conceptual Framework in IFRS Standards
On March 28, 2018 IASB presented the revised Conceptual Framework for Financial Reporting. The Conceptual Framework is not a standard itself but can be used as general guidance for transactions / events where specific IFRS standards are not available. Main improvements in the revised Conceptual Framework contains the introduction of concepts for measurement and presentation & disclosures, guidance for derecognition of assets and liabilities. In addition definitions of an asset & liability and criteria for recognition have been updated. No early adoption has been performed by FMO for these amendments.
Amendments to IFRS 3 Business Combinations
On October 22, 2018 The IASB has issued narrow-scope amendments to IFRS 3 Business Combinations to improve the definition of a business. The amendments will help companies determine whether an acquisition made is a business or a group of assets. The amendments are effective for business combinations for which the acquisition date is on or after the first annual reporting period beginning 2020. This amendment will have impact on future business acquisitions from FMO. As per December 31, 2019 FMO is not involved in any business combinations.
IFRS 17 Insurance Contracts
IFRS 17 was issued in May 2017 and is to ensure that an entity provides relevant information that faithfully represents such contracts. This information gives a basis for users of financial statements to assess the effect that insurance contracts have on the entity’s financial position, financial performance and cash flow. The standard is expected to be effective on or after January 1, 2021. This standard does not have impact on FMO.
Interest Rate Benchmark Reform - Amendments to IFRS 9, IAS 39 and IFRS 7
In September 2019, the IASB issued amendments to IFRS 9, IAS 39 and IFRS 7 Financial Instruments: Disclosures, which concludes phase one of its work to respond to the effects of Interbank Offered Rates (IBOR) reform on financial reporting. The amendments provide temporary reliefs which enable hedge accounting to continue during the period of uncertainty before the replacement of an existing interest rate benchmark with an alternative nearly risk-free interest rate (an RFR). The Board completed discussions and made tentative decisions related to the phase 2 of the reform in February 2020 (Phase 2 amendments) and expects to publish an exposure draft in April 2020. Tentative decisions are made regarding modification of a financial instrument made in the context of IBOR reform and provision of temporary relief for hedging relationships amended to reflect modifications that are required as a direct consequence of IBOR reform.
In January 2019, FMO started the BMR and IBOR ending project, a phased project with an expected end date of December 2021. FMO is preparing for the discount curve changes for EUR and USD derivatives (cleared interest rate swaps) later in 2020. Next to derivatives, impact is expected on valuations of other financial assets and liabilities mainly Loans to private sector and Debentures and Notes
The financial reporting impact relates to the hedge accounting impact of cleared and non-cleared derivatives discount curve change, the choice between cash compensation or compensating swaps. FMO expects the following transition that will impact hedge accounting:
Discounting change of cleared derivatives (EUR and USD) in 2020;
Discounting change for bilateral derivatives in 2021;
Floating rate reference rate change for loans and derivatives in 2021.
The effective date of the amendments to the standards is for annual periods beginning on or after 1 January 2020, with early application permitted. The requirements must be applied retrospectively. However, any hedge relationships that have previously been de-designated cannot be reinstated upon application, nor can any hedge relationships be designated with the benefit of hindsight. The Board tentatively decided that the effective date of the application of Phase 2 amendments is beginning on or after 1 January 2021, with earlier application permitted. No early adoption has been performed by FMO for these amendments.
Significant estimates, assumptions and judgments
In preparing the annual accounts in conformity with IFRS, management is required to make estimates and assumptions affecting reported income, expenses, assets, liabilities and disclosure of contingent assets and liabilities. Use of available information and application of judgment is inherent to the formation of estimates. Although these estimates are based on management’s best knowledge of current events and actions, actual results could differ from such estimates and the differences may be material to the annual accounts. For FMO the most relevant estimates and assumptions relate to:
The determination of the fair value of loans to private sector, derivative financial instruments and equity investments based on generally accepted modeled valuation techniques;
The determination of the ECL allowance for loans to private sector, loans commitments, guarantees given, interest bearing securities;
The pension liabilities and determination of related deferred tax assets.
Information about judgements made in applying accounting policies are related to the following:
Classification of financial assets: assessment of the business model within which the assets are held and assessment of whether the contractual terms of the financial assets are solely payments of principal and interest;
The inputs and calibration of the ECL models which include the various formulas and the choice of inputs, aging criteria and forward-looking information.
Foreign currency translation
FMO uses the euro as the unit for presenting its annual accounts. All amounts are denominated in thousands of euros unless stated otherwise. In accordance with IAS 21, foreign currency transactions are translated to euro at the exchange rate prevailing on the date of the transaction. At the balance sheet date, monetary assets and liabilities are reported using the closing exchange rate. Non-monetary assets that are not measured at cost denominated in foreign currencies are reported using the exchange rate that existed when fair values were determined.
Exchange differences arising on the settlement of transactions at rates different from those at the date of the transaction and unrealized foreign exchange differences on unsettled foreign currency monetary assets and liabilities, are recognized in the profit and loss account under ‘results from financial transactions’.
Unrealized exchange differences on non-monetary financial assets (investments in equity instruments) are a component of the change in their entire fair value. When a gain or loss for non-monetary financial asset is recognized through FVOCI (fair value through other comprehensive income), any foreign exchange component of the gain or loss is also recognized through FVOCI.
When preparing the annual accounts, assets and liabilities of foreign subsidiaries and FMO’s share in associates are translated at the exchange rates at the balance sheet date, while income and expense items are translated at weighted average rates for the period. Differences resulting from the use of closing and weighted average exchange rates, and from revaluation of a foreign entity’s opening net asset value at closing rate, are recognized directly in the translation reserve within shareholders’ equity. These translation differences are maintained in the translation reserves until disposal of the subsidiary and/or associate.
Offsetting financial instruments
Financial assets and liabilities are offset and the net amount is reported in the balance sheet when there is a legally enforceable right to offset the recognized amounts and when there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously. FMO only applies offsetting on derivatives with a master netting agreement.
Fair value of financial instruments
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When available, the fair value of an instrument is measured by using the quoted price in an active market for that instrument. If there is no quoted price in an active market, valuation techniques are used that maximize the use of relevant observable inputs and minimize the use of unobservable inputs.
Amortized cost and gross carrying amount
The amortized cost of a financial asset or financial liability is the amount at which the financial asset or financial liability is measured on initial recognition minus the principal repayments, plus or minus the cumulative amortization using the effective interest method of any difference between that initial amount and the maturity amount and, for financial assets, adjusted for any expected credit loss allowance.
Gross carrying amount of a financial asset is the amortized cost of a financial asset before adjusting for any expected credit loss allowance.
Financial assets - classification
On initial recognition, a financial asset is classified as measured at amortized cost (AC), fair value through P&L (FVPL) or fair value through other comprehensive income (FVOCI)
A financial asset is measured at AC if it meets both of the following conditions and is not classified as at FVPL:
It is held within a business model whose objective is to hold assets to collect contractual cash flows; and
Its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest (SPPI) on the principal amount outstanding.
A debt instrument is measured at FVOCI only if it meets both of the following conditions and is not measured as FVPL:
It is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and
Its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest (SPPI) on the principal amount outstanding.
For equity investments that are not held for trading an irrevocable election exists (on an instrument-by-instrument basis) to present subsequent changes in fair value in OCI.
Derivatives are mandatorily held at FVPL.
All financial assets not classified as measured at AC or FVOCI as described above are measured at FVPL. In addition, on initial recognition FMO may irrevocably designate a financial asset that otherwise meets the requirements to be measured at AC or at FVOCI as at FVPL if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise.
Transaction costs related to financial assets, not measured at FVPL, are directly added to its fair value for initial recognition and therefore attributed directly to its acquisition.
Business model assessment
FMO has made an assessment of the objective of the business model in which a financial asset is held at a portfolio level because this best reflects the way the business is managed and information is provided to management. The information that is considered includes:
How the performance of the portfolio is evaluated and reported to management of FMO;
The risks that affect the performance of the business model (and the financial assets held within that business model) and how those risks are managed;
The frequency, volume and timing of sales in prior periods, the reasons for such sales and expectations about future sales activity. However, information about sales activity is not considered in isolation, but as part of an overall assessment of how FMO’s stated objective for managing the financial assets is achieved and how cash flows are realized.
Financial assets whose performance is measured on a fair value basis are carried at FVPL because they are neither held to collect the contractual cash flows nor are they held both to collect contractual cash flows and to sell financial assets.
Contractual cash flow assessment
For the purpose of the contractual cash flow assessment, related to solely payments of principal and interest (SPPI), ‘principal’ is defined as the fair value of the financial asset on initial recognition. ‘Interest’ is defined as consideration for the time value of money, for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs (e.g. liquidity risk and administrative costs), as well as a profit margin. In assessing whether the contractual cash flows are solely payments of principal and interest, FMO has considered the contractual terms of the instrument. This includes assessing whether the financial asset contains a contractual term that could change the timing or amount of contractual cash flows such that it would not meet this condition. In making the assessment, FMO has considered among others:
Contingent events that would change the amount and timing of cash flows – e.g. prepayment and extension features, loans with performance related cash flows;
Features that modify the consideration for the time value of money – e.g. regulated interest rates, periodic reset of interest rates;
Loans with convertibility and prepayment features;
Terms that limit FMO’s claim to cash flows from specified assets – e.g. non-recourse assets;
Contractually linked instruments.
Financial assets can be only reclassified after initial recognition in very infrequent instances. This happens if the business model for managing financial assets has changed and this change is significant to FMO operations.
Cash and cash equivalents (Banks and Short-term deposits)
Cash and cash equivalents consist of banks and short-term deposits that usually mature in less than three months from the date of acquisition. Short-term deposits are all measured at AC with the exception of money market funds and commercial paper which are measured at FVPL. These financial instruments are very liquid with high credit rating and which are subject to an insignificant risk of changes in fair value. There is no restriction on these financial instruments and FMO has on demand full access to the carrying amounts. Unrealized gains or losses on the money market funds & commercial loan portfolio (including foreign exchange results) are reported in the results from financial transactions.
Interest bearing Securities
Interest bearing securities include bonds which are held for long-term liquidity purposes. These securities are measured at AC since they comply with the classification requirements for AC as indicated in the section 'Financial assets – classification'. The securities are initially measured at fair value of the consideration paid, plus transaction costs incurred. Subsequently, they are measured at AC using the effective interest rate method. For the interest-bearing securities an allowance for ECL is estimated. For more details we refer to the section 'Financial assets – Impairment'
Loans to private sector
Loans originated by FMO include:
Loans to the private sector in developing countries for the account and risk of FMO;
Loans provided by FMO and, to a certain level, guaranteed by the Dutch government.
Loans to the private sector on the balance sheet of FMO include:
Loans measured at AC which comply with the classification requirements for AC as indicated in the section 'Financial assets – classification'. These loans are initially measured at fair value of the consideration paid plus incremental direct transaction costs incurred. Subsequently, the loans are measured at AC using the effective interest rate method;
Loans mandatorily measured at FVPL which do not comply with the classification requirements for AC as indicated in the section 'Financial assets – classification'. These are measured at fair value with changes recognized in profit and loss.
Equity investments on the balance sheet of FMO include investments in which FMO has no significant influence:
Equity investments are measured at FVPL. FMO has a long-term view on these equity investments, usually selling its stake within a period of 5 to 10 years. Therefore these investments are not held for trading and are measured at fair value with changes recognized in profit and loss;
Equity investments designated as at FVOCI. The designation is made, since these are held for long-term strategic purposes and not for trading. These investments are measured at fair value. Dividends are recognized as income in profit and loss unless the dividend clearly represents a recovery part of the cost of the investment. Other net gains and losses are recognized in the fair value reserve (OCI) and are never reclassified to profit and loss
Investments in associates
Measurement and criteria
Equity investments in companies in which FMO has significant influence (‘associates’) are measured using the equity accounting method. Significant influence is normally evidenced when FMO has from 20% to 50% of a company’s voting rights unless:
FMO is not involved in the company’s operational and/or strategic management by participation in its Management, Supervisory Board or Investment Committee; and
There are no material transactions between FMO and the company; and
FMO makes no essential technical assistance available.
Investments in associates are initially recorded at cost and the carrying amount is increased or decreased after the date of acquisition to recognize FMO’s share of the investee’s results or other results directly recorded in the equity of associates
Impairment of investments in associates
Investments in associates are reviewed and analyzed at least on a semi - annual basis. A net investment in an associate is impaired or impairment losses occur where there is objective evidence of impairment as a result of one or more events that occurred after initial recognition of the net investment and the loss event has an impact on the estimated future cash flows from the net investment that can be reliably estimated. A significant or prolonged decline in the fair value of an investment in an equity instrument below its cost is considered as the primary objective evidence of impairment, in addition to other observable loss events. FMO considers more than 10% difference between fair value and its cost as significant and greater than one year as prolonged.
When FMO decides to take an impairment on one of these investments, the impairment is recognized in the profit and loss account under 'Share in the results on associates'.
Property plant and equipment
Furniture and leasehold improvements
Property plant and equipment (PP&E) includes tangible assets such as buildings, vehicles, furniture, and office equipment.
Furniture and leasehold improvements are stated at historical cost less accumulated depreciation.
Depreciation for furniture and leasehold improvement is calculated using the straight-line method to write down the cost of such assets to their residual values over their estimated useful lives. Useful life for furniture is 5 years and 5 to 10 years for leasehold improvements.
These assets are reviewed for impairment whenever triggering events indicate that the carrying amount may not be recoverable. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. Gains and losses on disposal of property and equipment are determined by reference to their carrying amount and are reported in operating profit.
IFRS 16 leases: right-of-use assets
As per January 1 2019, FMO records the right-of-use assets for it's operational leases according to IFRS 16. Reference is made to 'IFRS 16 - Leases' section of this chapter. These assets consist of buildings, lease vehicles and office equipment.
Expenditures directly associated with identifiable and unique software products or internally developed software, controlled by FMO and likely to generate economic benefits are recognized as assets. These assets include staff costs incurred to make these software products operable in the way management intended for these software products. These assets are recognized at cost less accumulated amortization and accumulated impairment losses. These assets generally have a definite useful life between 3 - 5 years.
Costs associated with maintaining software programs are recognized in the profit and loss account as incurred. Expenditure that enhances or extends the performance of software programs beyond their original specifications is recognized as a capital improvement and added to the original cost of the software.
As from January 1, 2019 FMO has changed their assumption regarding the useful life of this internally developed software. As from 2019, FMO assesses the useful life of each new software individually while before 2019, useful life of 5 years was applied as assumption, which represented an average.
Amortization and impairment
Internally developed software is amortized on basis of the useful life on straight - line basis. Furthermore, these assets are tested for impairment when there is an indication of impairment, or annually in the case of software that is not yet ready for use. In case an asset is no longer in use, the asset is impaired.
Financial assets – Impairment
FMO estimates an allowance for expected credit losses for the following financial assets:
Interest bearing securities;
Loans to the private sector;
Loan commitments and financial guarantee contracts issued (off balance items).
No impairment loss is recognized on equity investments. Specific impairments on loans guaranteed by the Dutch State are accounted for by FMO for uncovered amounts however these amounts can be eligible for compensation.
Impairment stages loans to the private sector
FMO groups its loans into Stage 1, Stage 2 and Stage 3, based on the applied impairment methodology, as described below:
Stage 1 – Performing loans: when loans are first recognized, an allowance is recognized based on a 12-month expected credit loss;
Stage 2 – Underperforming loans: when a loan shows a significant increase in credit risk, an allowance is recorded for the lifetime expected credit loss;
Stage 3 – a lifetime expected credit loss is recognized for these loans. In addition, in Stage 3, interest income is accrued on the AC of the loan net of allowances.
The ECL model is primarily an expert based model and this model is frequently bench marked with other external sources if possible.
ECL measurement Stage 1 and Stage 2
ECL allowance reflects unbiased, probability-weighted estimates based on loss expectations resulting from default events over either a maximum 12-month period from the reporting date or the remaining life of a financial instrument. The method used to calculate the ECL allowances for Stage 1 and Stage 2 assets are based on the following parameters:
PD: the Probability of Default is an estimate of the likelihood of default over a given time horizon. FMO uses a scorecard model based on quantitative and qualitative indicators to assess current and future clients and determine PDs. The output of the scorecard model is mapped to the Moody’s PD master scale based on idealized default rates. For accounting purposes a point in time adjustment is made to these PDs using a z-factor approach to account for the business cycle;
EAD: the Exposure at Default is an estimate of the exposure at a future default date, taking into account expected changes in the exposure after the reporting date, including repayments of principal and interest, scheduled by contract or otherwise, expected draw downs and accrued interest from missed payments;
LGD: the Loss Given Default is an estimate of FMO’s loss arising in the case of a default at a given time. It is based on the difference between the contractual cash flows due and any future cashflows or collateral that the FMO would expect to receive;
Z-factor: the z-factor is a correction factor to adjust the client PDs for current and expected future conditions. The z-factor adjusts the current PD and PD two years into the future. GDP growth rates per country from the IMF, both current and forecasted, are used as the macro-economic driver to determine where each country is in the business cycle. Client PDs are subsequently adjusted upward or downward based on the country where they are operating.
Macro economic scenarios in PD estimates
In addition to the country-specific z-factor adjustments to PD, FMO applies probability-weighed scenarios to calculate final PD estimates in the ECL model. The scenarios are applied globally, and are based on the vulnerability of emerging markets to prolonged economic downturn. The scenarios and their impact are based on IMF data and research along with historical default data in emerging markets.
The three scenarios applied are:
Positive scenario: Reduced vulnerability to an emerging market economic downturn;
Base scenario: Vulnerability and accompanying losses based on FMO’s best estimate from risk models;
Downturn scenario: Elevated vulnerability to an emerging market economic downturn.
ECL measurement Stage 3
The calculation of the expected loss for Stage 3 is different when compared to the Stage 1 and Stage 2 calculation. Reason for this is that loan-specific impairments provide a better estimate for Stage 3 loans in FMO’s diversified loan portfolio. The following steps are taken which serve as input for the IRC to decide about the specific impairment level:
Calculate probability weighted expected loss based on multiple scenarios including return to performing (and projected cash flows), restructuring, and write-off or sale;
Apply the impairment matrix (based on LGD, past due amounts and client rating);
Take expected cash flows from collateral and “firm offers” into account. The cashflows from collateral and "firm offers" serve as a cap for the provision (or a floor for the value of the loan).
Staging criteria and triggers
Financial instruments classified as low credit risk
FMO considers all financial instruments with an investment grade rating (BBB- or better on the S&P scale or F10 or better on FMO’s internal scale) to be classified as low credit risk. For these instruments, the low credit risk exemption is applied and irrespective of the change of credit risk (as long as it remains investment grade) a lifetime expected credit loss will not be recognized. This exemption lowers the monitoring requirements and reduces operational costs. This exemption is applied for Interest bearing securities, Bank and current accounts with subsidiaries and state funds.
No significant increase in credit risk since origination (Stage 1)
All loans which have not had a significant increase in credit risk since contract origination are allocated to Stage 1 with an ECL allowance recognized equal to the expected credit loss over the next 12 months. The interest revenue of these assets is based on the gross amount.
Significant increase in credit risk (Stage 2)
IFRS 9 requires financial assets to be classified in Stage 2 when their credit risk has increased significantly since their initial recognition. For these assets, a loss allowance needs to be recognized based on their lifetime ECLs. FMO considers whether there has been a significant increase in credit risk of an asset by comparing the lifetime probability of default upon initial recognition of the asset against the risk of a default occurring on the asset as at the end of each reporting period. Interest revenue for these financial assets is based on the gross amount. This assessment is based on either one of the following items:
The change in internal credit risk grade with a certain number of notches (see diagram below) compared to the internal rating at origination;
The fact that the financial asset is 30 days past due or more (unless reasonable information and supportable information is available demonstrating that the client can service its debt);
The application of forbearance. (refer to section 'Modification of financial assets')
Definition of default - Stage 3 financial assets
A financial asset is considered in default when any of the following occurs:
The client is past due more than 90 days on any material obligation to FMO, including fees (excluding on-charged expenses);
FMO judges that the client is unlikely to pay its credit obligation to FMO due to occurrence of credit risk deterioration and the Investment Risk Committee (IRC) decides on a specific impairment on individual basis. The triggers for deciding on specific impairment include among others bankruptcy, days of past due, central bank intervention, distressed restructuring or any material adverse change or development that is likely to result in a diminished recovery of debt.
As per 2019, FMO has adjusted the Stage 3 definition and aligned this to the currently effective Basel definition of Default. This alignment is in line with market practices implemented by peers after implementation of IFRS 9 as per 2018. Comparatives for 2018 have not been restated as the impact on profit and loss statement is minor for loans which were more than 90 days past due and not specifically impaired.
The following diagram provides a high level overview of IFRS 9 staging triggers at FMO.
The table here below provides an overview how internal ratings are equivalent to external ratings.
Indicative external S&P rating
BBB and higher ratings
F17 and lower
CCC+ and lower ratings
Reversed staging relates to criteria which trigger a stage transfer to Stage 1 for loans which are in Stage 3 or Stage 2. The following conditions must apply for a transfer to stages representing lower risk:
Loans which are in stage 3 will revert to Stage 2 when the specific impairment is released by the IRC and there are no obligations past due for more than 90 days;
Loans which are in stage 2 will only revert to stage 1 when internal ratings have improved to the zone lower than the minimum notch downgrade from origination that led to transition to stage 2, the forbearance probation period of minimum two years has passed and no material amounts are past due for more than 30 days.
Written-off financial assets
A write-off is made when a claim is deemed non - collectible, when FMO has no reasonable prospects of recovery after, among others, enforcement of collateral or legal enforcement with means of lawsuits. Furthermore, a write-off is performed when the loan is being forgiven by FMO. There are no automatic triggers, which would lead to a write-off of the loan; specific impaired loans are assessed on individual basis depending on their circumstances.
Write-offs are charged against previously booked impairments. If no specific impairment is recorded on basis of IRC decision making from the past, the write-off is included directly in the profit and loss account under ‘Impairments’.
Modification of financial assets
In 2019, FMO enhanced the policy with criteria applied to determine derecognition and the events leading to recording of modification gain or loss in order to align the criteria more closely with the type of restructuring being carried out by FMO. The revised criteria make use of specific events-based triggers in order to determine whether a specific change in contractual terms gives rise to derecognition or modification instead of relying only on a quantitative threshold related to differences in net present value (NPV). Application of the revised criteria to the comparative figures for 2018 did not demonstrate any impact and as such the comparatives were not restated.
Modification of terms and conditions arise from lending operations where FMO enters into arrangements with their clients, which implies modifications to existing contractual cash flows or terms and conditions. Such arrangements are usually initiated by FMO when financial difficulty occurs or is expected with a borrower. The purpose of such an arrangement is usually to collect original debt over different terms and conditions from the borrower. Modifications may include extending the tenor, changing interest rate percentages or their timing, or changing of interest margin.
During the modification assessment, FMO will evaluate whether the modification event leads to a derecognition of the asset or to a modification accounting treatment. Generally loans that are sold to a third party or are written off lead to a derecognition. When existing debt is converted into equity, a derecognition of the debt will occur and recognized again on the balance sheet as equity. For modifications in interest percentages or tenor changes of existing amortized cost loans do not pass the SPPI test, the loan will also be derecognised and will be recognised as new loans on FMO's balance sheet according to the new classification.
When modification measures relate to changes in interest percentages or extensions of tenors and the loan is at amortized cost, FMO will recalculate the gross carrying amount of the financial asset by discounting the modified expected cash flows using the original effective interest rate and recognizes the difference in the gross carrying amount as a modification gain or loss under 'interest income related to financials assets at amortized cost'. However when the NPV of the original loan is substantially different than the NPV of the modified loan, the original loan is derecognized and re-recognized on the balance sheet. FMO considers a variance of greater than 10% as substantially different.
Modification of contractual terms versus forbearance
Forbearance is not an IFRS term, but relates to arrangements with clients which imply modifications to existing terms and conditions due to financial difficulties of the client. Financial difficulties include, among others, prospects of bankruptcy or central bank intervention. Forbearance must include concessions to the borrower such as release of securities or changes in payment covenants that implies giving away payment rights. Forbearance measures do not necessarily lead to changes in contractual cash flows.
Theoretically, modification of contractual cash flows or terms and conditions, does not necessarily apply to clients in financial difficulties or due to potential higher credit risk, however at FMO, a modification of the contractual terms is usually initiated when financial difficulty occurs or is expected. Therefore only in exceptional cases, changes in modifications of contractual terms not following from credit risk related triggers, will not lead to forbearance e.g. in case of an environmental covenant breach. At FMO, generally modifications will follow from financial difficulties of the borrower and will be classified as forborne assets.
Derivative financial instruments are initially recognized at fair value on the date FMO enters into a derivative contract and are subsequently remeasured at its fair value. Changes in the fair value of these derivative instruments are recognized immediately in profit and loss. All derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative.
Part of the derivatives related to the asset portfolio concerns derivatives that are embedded in other financial instruments. Such combinations are known as hybrid instruments and arise predominantly from providing mezzanine loans and equity investments.
Derivatives embedded in host contracts, where the host is a financial asset in the scope of IFRS 9, are not separated. Instead, the whole hybrid financial instrument as a whole is assessed for classification as set out in the section 'Financial assets- Classification'.
Certain derivatives embedded in other contracts are measured as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract, the host contract is not carried at fair value through profit or loss, and if a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative. These embedded derivatives are measured at fair value with changes in fair value recognized in the statement of profit or loss. An assessment is carried out when FMO first becomes party to the contract. When there is a change in the terms of the contract that significantly modifies the expected cash flows, the modification results in derecognition of the original instrument and leads to recognition of a new instrument again on the balance sheet.
FMO uses derivative financial instruments as part of its asset and liability management to manage exposures to interest rates and foreign currencies. FMO applies micro fair value hedge accounting to the funding portfolio with the purpose of mitigating exposure to interest rate risk (refer to hedge accounting paragraph in this section).
Furthermore, economic hedges are conducted to hedge items which do not fulfill the criteria of hedge accounting and are presented as 'Derivatives other than hedging derivatives'. Changes of market value for these derivatives are immediately recognized under profit or loss.
Definition Fair value hedges
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recognized in the statement of profit or loss, together with fair value adjustments to the hedged item attributable to the hedged risk. If the hedge relationship no longer meets the criteria for hedge accounting, the cumulative adjustment of the hedged item is, in the case of interest- bearing instruments, amortized through the statement of profit or loss over the remaining term of the original hedge or recognized directly when the hedged item is derecognized. For non-interest-bearing instruments, the cumulative adjustment of the hedged item is recognized in the statement of profit or loss only when the hedged item is derecognized.
FMO applies micro fair value hedge accounting when transactions meet the specified criteria. When a financial instrument is designated as a hedge, FMO formally documents the relationship between the hedging instrument(s) and hedged item(s). Documentation includes its risk management objectives and its strategy in undertaking the hedge transaction, together with the methods that will be used to assess the effectiveness of the hedging relationship. FMO only applies micro fair value hedge accounting on the funding portfolio. Changes in the fair value of these derivatives are recorded in the profit and loss account under results of financial transactions. Any changes in the fair value of the hedged liability that are attributable to the hedged risk are also recorded in the profit and loss account. If a hedge relationship is terminated for reasons other than the derecognition of the hedged item, the difference between the carrying value of the hedged item at that point and the value at which it would have been carried had the hedge never existed (the ‘unamortized fair value adjustment’) is amortized and included in net profit and loss over the remaining term of the original hedge. If the hedge item is derecognized, e.g. sold or repaid, the unamortized fair value adjustment is recognized immediately in profit and loss.
The method of recognizing the resulting fair value gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. FMO designates certain derivatives as hedges of the fair value of recognized liabilities or firm commitments. Hedge accounting is used for derivatives designated in this way provided certain criteria are met. At the inception of the transaction FMO documents the relationship between hedging instruments and hedged items, its risk management objective, together with the methods selected to assess hedge effectiveness. FMO also documents its assessment, at hedge inception, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of the hedged items.
FMO only applies micro-hedging strategies, hence at hedge inception the prospective test is conducted.
A hedging relationship qualifies for hedge accounting, if it meets all of the below effective requirements:
There is an economic relationship between the hedged item and the hedging instrument, Economic relationship means that the hedging instrument and the hedged item must be expected to move in opposite directions as a result of a change in the hedged risk;
The effect of credit risk does not dominate the value changes that result from that economic relationship. In other words, credit risk that can arise on both the hedging instrument and the hedged item in the form of counterparty’s credit risk or the entity’s own credit risk does not have a very significant effect on the fair value of the hedged item or the hedging instrument;
The hedge ratio defined as the ratio between the amount of hedged item and the amount of hedging instrument shall not reflect an imbalance that would create hedge ineffectiveness. For a perfectly match of the underlying of the hedging instrument with the designated hedged risk, the hedge ratio would be 1:1 or less. The level of the hedge will be discussed by Treasury and Risk Management.
Hedge accounting shall be discontinued if the qualification criteria are not met. The scenarios are as follows:
The risk management objective has changed
Full or partial
There is no longer an economic relationship between the hedged item and the hedging instrument
The effect of credit risk dominates the value changes of the hedging relationship
As part of rebalancing, the volume of the hedged item or the hedging instrument is reduced
The hedging instrument expires
The hedging instrument is (in full or in part) sold, terminated or exercised
Full or partial
The hedged item (or part of it) no longer exists or is no longer expected to occur
Full or partial
Further reference is made to Note 'Derivative financial instruments and hedge accounting'.
Rebalancing is performed to align accounting with what has happened in the actual basis relationship, between the hedged item and hedging instrument by either altering one of them. Rebalancing only affects the expected relative sensitivity between the hedged item and the hedging instrument going forward, as ineffectiveness from past changes in the sensitivity will have already been recognized in profit or loss. FMO will rebalance a hedging relationship if that relationship still has an unchanged risk management objective but no longer meets the hedge effectiveness requirements regarding the hedge ratio.
For more details on hedge accounting we refer to Note 'Derivative financial instruments and hedge accounting'.
Issued financial guarantee contracts are measured at the higher of
ECL allowance or the amount of the provision under the contract; and
The amount initially recognized less, where appropriate, cumulative amortization recognized in accordance with the revenue recognition policies as set out in sections ‘Interest income’ and ‘Fee and commission income’. These fees are recognized as revenue on an accrual basis over the period commitment.
FMO applies the same methodology as loans to private sector for measurement of ECL allowance of guarantees. Refer to chapter 'Financial assets - impairment' in this section. Provisions resulting from guarantees are included in ‘Provisions’.
Debentures and notes
Debentures and notes consist of medium-term notes under FMO’s Debt Issuance Programme or other public issues. Furthermore a subordinated note is also included in the Debentures and Notes. Under IFRS this note is classified as financial liability, but for regulatory purposes it is considered as Tier 2 capital.
Debentures and notes can be divided into:
Notes qualifying for hedge accounting (measured at AC and adjusted for the fair value of the hedged risk);
Notes that do not qualify for hedge accounting (valued at AC).
Debentures and notes measured at amortized cost
Debentures and notes are initially measured at cost, which is the fair value of the consideration received, net of transaction costs incurred. Subsequent measurement is AC, using the effective interest rate method to amortize the cost at inception to the redemption value over the life of the debt.
Debentures and notes eligible for hedge accounting
When hedge accounting is applied to debentures and notes, the carrying value of debt issued is adjusted for changes in fair value related to the hedged risk. The fair value changes are recorded in the profit and loss account. Further reference is made to sections ‘Derivative instruments’ and ‘Hedge accounting’ of this chapter.
Provisions are recognized when:
FMO has a present legal or constructive obligation as a result of past events; and
It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and
A reliable estimate of the amount of the obligation can be made.
A provision is made for the liability for retirement benefits, loan commitments, guarantees, legal events and severance arrangements. Further reference is made to section ‘Retirement benefits’.
FMO provides all employees with retirement benefits that are categorized as a defined benefit. A defined benefit plan is a pension plan defining the amount of pension benefit to be provided, as a function of one or more factors such as age, years of service or compensation.
This scheme is funded through payments to an insurance company determined by periodic actuarial calculations. The principal actuarial assumptions are set out in Note 18. All actuarial gains and losses are reported in shareholders’ equity, net of applicable income taxes and are permanently excluded from profit and loss.
The net defined benefit liability or asset is the present value of the defined benefit obligation at the balance sheet date minus the fair value of plan assets, together with adjustments for unrecognized actuarial gains/losses and past service costs. Independent actuaries perform an annual calculation of the defined benefit obligation using the projected unit credit method. The present value of the defined benefit obligation is determined by the estimated future cash outflows using, in accordance with IAS 19, interest rates of high-quality corporate bonds, which have terms to maturity approximating the terms of the related liability. FMO has a contract with a well-established insurer, in which all nominal pension obligations are guaranteed and the downside risk of pension assets is mitigated.
When the fair value of the plan’s assets exceeds the present value of the defined benefit obligations, a gain (asset) is recognized if this difference can be fully recovered through refunds or reductions in future contributions. No gain or loss is recognized solely as a result of an actuarial gain or loss, or past service cost, in the current period.
FMO recognizes the following changes in the net defined benefit obligations under staff costs:
Service costs comprising current service costs, past-service costs (like gains and losses on curtailments and plan amendments);
Net interest expense or income.
Past-service costs are recognized in profit and loss on the earlier of:
The date of the plan amendment or curtailment; and
The date that FMO recognizes restructuring-related costs.
Net interest is calculated by applying the discount rate to the net defined benefit liability or asset.
Income tax profits is based on the applicable tax laws in each jurisdiction and recognized as an expense in the period in which profits arise. The tax effects of income tax losses, available for carry-forward, are recognized as a deferred tax asset if it is probable that future taxable profit will be available against which those losses can be utilized. Deferred tax liabilities are recognized for temporary differences between the carrying amounts of assets and liabilities in the balance sheet and their amounts as measured for tax purposes, which will result in taxable amounts in future periods using the liability method. Deferred tax assets are recognized for temporary differences, resulting in deductible amounts in future periods, but only when it is probable that sufficient taxable profits will be available against which these differences can be utilized.
The main temporary differences arise from the post-retirement benefits provision and the fair value movements on equity investments accounted for at FVOCI.
The contractual reserve consists of the cumulative part of the annual net results that FMO is obliged to reserve under the Agreement State-FMO of November 16, 1998. This reserve is not freely distributive.
This special purpose reserve contains the allocations of risk capital provided by the Dutch State to finance the portfolio of loans and equity investments.
Fair value reserve
The fair value reserve includes gains and losses of equity investments designated as at FVOCI. Gains and losses on such equity investments are never reclassified to profit or loss. Cumulative gains and losses recognized in this reserve are transferred to Other reserves on disposal of an investment.
The assets, liabilities, income and expenses of foreign subsidiaries and associates are translated using the closing and weighted average exchange rates. Differences resulting from the translation are recognized in the translation reserve.
Actuarial result pensions
The unrealized actuarial gains and losses related to the defined benefit plans are included in the Actuarial result pensions. The movements in this reserve are not reclassified to the profit and loss account.
The other reserves include the cumulative distributable net profits. Dividends are deducted from other reserves in the period in which they are declared.
The undistributed profit consists of the part of the annual result that FMO is not obliged to reserve under the Agreement Dutch State-FMO of November 16, 1998.
The non-controlling interest is related to the investment in Equis DFI Feeder L.P. held by other investors.
Profit and loss
Net interest income: interest income and interest expenses
Interest income and interest expenses from financial instruments measured at AC are recognized in the profit and loss account for all interest-bearing financial instruments on an accrual basis using the ‘effective interest’ method based on the fair value at inception. Interest income and interest expenses also include amortized discounts, premiums on financial instruments and interest related to derivatives
When a financial asset measured at AC is credit-impaired and regarded as Stage 3, interest income is calculated by applying the effective interest rate to the net AC of the financial asset. If the financial asset is no longer credit-impaired, the calculation of interest income reverts to the gross basis.
Interest income and interest expenses from financial instruments measured at FVPL reflect fair value gains and losses mainly related to the derivatives portfolio. Moreover, interest income from loans measured at FVPL are also recognized under 'Interest income from financial instruments measured at FVPL'.
Fee and commission income and expense
FMO earns fees from a diverse range of services. The revenue recognition for financial service fees depends on the purpose for which the fees are charged and the basis of accounting for the associated financial instrument. Fees that are part of a financial instrument carried at fair value are recognized in the profit and loss account. Fee income that is part of a financial instrument carried at AC can be divided into three categories:
Fees that are an integral part of the effective interest rate of a financial instrument (IFRS 9)
These fees (such as front-end fees) are generally treated as an adjustment to the effective interest rate. When the facility is not used and the commitment period expires, the fee is recognized at the moment of expiration. However, when the financial instrument is to be measured at fair value subsequent to its initial recognition, the fees are recognized as interest-income;
Fees earned when services are provided (IFRS 15)
Fees charged by FMO for servicing a loan (such as administration fees and agency fees) are recognized as revenue when the services are provided. Portfolio and other management advisory and service fees are recognized in line with the periods and the agreed services of the applicable service contracts;
Fees that are earned on the execution of a significant act (IFRS 15)
These fees (such as arrangement fees) are recognized as revenue when the significant act has been completed.
Dividends are recognized in dividend income when a dividend is declared. The dividend receivable is recorded at declaration date
Results from equity investments
Gains and losses in valuation of FMO's equity investment portfolio are recognized under 'Results from equity investments'. These gains and losses include foreign exchange results of equity investments which are measured at fair value. As mentioned earlier, the foreign exchange results for equity investments, measured at fair value through OCI are recognized in the Shareholder's equity.
Results from financial transactions
Results from financial transactions include foreign exchange results (excluding foreign exchange results related to equity investments measured at fair value), valuation gains and losses related to derivatives, driven by changes in the market. Furthermore, the valuation gains and losses related to loans measured at fair value are recognized in the profit and loss immediately under 'Results from financial transactions.
Financial assets of FMO and off-balance items are subject to impairments. For impairment methodologies and criteria, reference is made to relevant 'Financial Assets' paragraph in this section above.
The operating segments are reported in a manner consistent with internal reporting to FMO’s chief operating decision maker. The chief operating decision maker who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Management Board. FMO has decided to present its operating segments based on servicing units instead of strategic sector to be more aligned with internal reporting towards the Management Board. Reference is made to the section 'Segment Information' for more details on operating segments